Episode 39 – Questions from listeners
Episode transcript:
[music intro]
Jenny
Welcome back to Fund Your Future with DRS. And we’re looking at some Frequently Asked Questions today. I think this is our second episode with some FAQs that we’ve been getting from some of our listeners. So, let’s jump into it.
So, we have Emily, who asked: Would you mind covering the option of removing all or some of your PERS money into different accounts and how that affects your service credit? I’d be curious how this process differs for people who have vested versus people who haven’t.
Seth
Yeah, there’s a lot here, and it does vary by what plan you’re in. So, Plan 3 members, we’ve talked about this where they have, two parts to their retirement benefit. They have their pension benefit, the monthly benefit that they’re going to receive when they retire. And then they also have their investment account. And so, for Plan 3 members, when they stop working, they can take out their contributions whenever they want.
It has no impact on their retirement benefit – on the pension benefit. They can roll it over into an IRA or do whatever else they want if they want to manage their own investments. However, a Plan 1 or 2 member and we’ll just focus on Plan 2 members now, because that’s where most people are at.
If they stop working and take out their retirement contributions, they have to take them all out. There’s no, you know, “I just need $100 to pay off a debt or something.” You have to take out all the funds if you’re going to withdraw the contributions. And if you do that, you forfeit all of the retirement credit that you earn. So, you’re giving up your pension benefit by taking that withdrawal of contribution.
Jenny
And this is something that a person would do after they retire?
Seth
They would do it after they end employment. So, they could do that at age 25, or they could do that at age 85. Now, if you’re over 65 and you’re vested, as the question was asking, you’re eligible to start collecting your monthly pension benefit. And there are some people who decide, I don’t want that monthly pension benefit.
I just want the contributions that were paid in. I’m going to roll those over into a different retirement account, and I’m going to manage them myself. But then once again, you forfeit that monthly pension. So, for people who are vested, and that’s generally having more than five years of time worked, they have a choice to make.
Would I rather have my contributions or would I rather have the service credit that’s going to allow me to collect the pension at age 65? For people who are younger, it can be, sometimes, kind of a coin flip. I could go invest that money in the market over the next 30 or 40 years. It could grow significantly.
And my pension is going to be based on my average salary from 30 or 40 years prior. It’s going to be smaller than if I’m just, you know, retiring now. Inflation is going to eaten away at that, that size of that pension benefit because it’s being based on salary. So, it’s definitely something that people could consider when they end employment if they’re vested.
If you’re not vested, you still lose the service credit. But there’s no pension benefit associated with it since you’re not vested. Though, sometimes what happens is people they work for a year, they leave employment, they take out their contributions because they think they’re never coming back. And then they come back a year later and they’re starting from zero again as far as the amount of service credit. So, then they have to still work five years from that point going forward.
Jenny
Yeah. So maybe if you do end up leaving, just maybe kind of keep the money in there for a couple of years to give yourself a little time to decide.
Seth
Yeah. You know, I think it’s really hard for somebody who’s 25 to think about what their life is going to be like when they’re 35 or 45. What different path could you take? And so, for a lot of people, it does make sense to leave it there for a year or two. But people have bills. People have expenses.
They might need those funds more immediately. And I think there was a second part to the question. Basically, can I pay that money back when I come into employment? I think we talked about this on a previous episode with Nisha, but you can. So, once you return to employment, you have five years to pay those contributions back, plus the interest that it accrued during that time period.
And then if it’s beyond five years, it’s much more expensive to purchase that time back. So, for some people who if they if they’ve rolled the money over into an IRA or another retirement account, they could just roll it back in and pay that bill. Maybe it’s going to cover the whole bill, maybe it’s not going to quite cover the bill, depending on how the money did while it was invested and what happened with the interest rates during that time. But it does allow you some flexibility versus if you take it as cash, then you have to go find that money to pay it back later.
Jenny
Yeah, for sure. I think that sometimes people are kind of afraid of rolling their money over, and it can be something that people do all the time.
Seth
Yeah, it’s very normal, I think, for people to consolidate their retirement accounts, roll them over from, you know, if you’ve had multiple employers roll them over into one IRA or something like that, or into your new employer or into DCP, if you’re now a state employee and you have retirement accounts from multiple places. But it is a little bit of work.
I mean, there’s a little bit of paperwork, whether you do it online or through a paper form or calling or doing over the phone. You know, I think all of us get a little bit frustrated with the administrative burden. Like, I don’t know how you are about setting up doctor’s appointments or things like that. It’s just like, “oh, I something I should do or I could do,” but it’s not automatic. There’s a little bit of inertia you have to overcome if you’re going to think about rolling over retirement accounts.
Jenny
Yeah, for sure. Okay. Well, our second question today comes from Rachel, who asked: What happens if I die before I retire? Will my spouse have an option to receive a pension benefit? Could they both be a beneficiary and a survivor?
Seth
Yeah. So, this this question came out of our episode where we talked about the difference between beneficiaries and survivors. And it actually sparked some interesting questions because I think it’s really important for folks to realize that sometimes state law overrides whatever choices you had. And we talked a little bit about this on the episode, but we wanted to go in a little bit more depth about if you have a surviving spouse and you pass away, or if you have a minor child and pass away.
In most cases, if you have more than 20 years in the system or 10 years and depends on the system and plan, but that surviving spouse has an option of being a beneficiary or a survivor. So, they can say, “I’m going to be a beneficiary, I’m going to take the contributions.” And in some ways, it’s actually similar to the conversation we were just having about rolling out your money or taking the pension benefit. Am I going to take this ongoing monthly benefit as a survivor? It might have some reductions because it’s earlier on, maybe not at age 65.
Jenny
Could they wait until they are 65?
Seth
No. So that’s… there’s some decisions that have to be made. Does it make sense to take this monthly benefit? It’s as if the person who passed away selected the Joint Life Benefit of 100%. So, the benefit that you would get is 100% survivor, meaning that if I’m going to get this amount and then when I pass away, my spouse is going to continue to receive the same pension benefit.
That same benefit is available to my spouse if I pass away and haven’t yet retired. they can take that monthly benefit. But, if they’re a Plan 2 member, they can choose to say, “I’m going to take the contributions instead. I’m going to roll them over into an IRA, or I’m going to take them as cash.” And its sort of similar as well with Plan 3 members, where those contributions are separate, those go to your beneficiary, but your surviving spouse may be eligible for a survivor benefit, an ongoing pension benefit.
So, you can name, you know, your brother or sister or neighbor as your beneficiary, and they get the contributions. But your spouse, your surviving spouse would get the ongoing monthly pension benefit, if you meet the requirements for the amount of service credit. We should probably have somebody on the podcast from our… we have a whole team of folks who work with people’s accounts when they pass away, and it gets a little bit nuanced because the different systems and plans have different rules.
And so, we tend not to go into too much depth about that. But in a lot of ways, those benefits serve in a similar way, like a life insurance policy — that they’re going to continue to receive some monthly benefit for the rest of their life.
Jenny
Yeah. And so, our third question today is something a little bit more of a general question that we get at DRS is: Is my pension benefit based on the last five years of my career?
Seth
Yeah, I joked about this in a number of presentations I’ve done. In most of the systems it’s called your average final compensation, the highest five-year period, average final compensation. In some of the other plans, it’s called final average salary. There are different names depending on the different plans you’re in. And that in itself is confusing. But the word final in there makes it sound like it is your last five years.
And generally, that’s true but it is really your highest five years. And we have a short video on our website that shows this in a visual. We really line up every year you worked really every month you worked and try to find where that highest average five is, no matter where it is in your career. And I think for a lot of people, this can be relieving.
If I’ve worked 20 or 30 years and I just want to downshift a little bit, I want to work an 80% job or I want to go to half time, or I want to take a lower paying job that might have a little more freedom.
Jenny
Yeah, I could definitely see that if you had been working like a really high stress job for a while and like you said, wanting to downshift for the last couple of years of your career.
Seth
Yeah, it doesn’t negatively impact your pension at that point. Your average salary is just locked in. It’s what it was, you know, maybe three or four or five years ago, or 10 or 20 years ago, really, depending on the situation. We’re going to line up all of your salary and we’re going to look for the highest five years, no matter where it happened in your career.
Jenny
That’s really awesome. I love that. And then our final question today is one that we get all the time, which is: How does one retire with DRS? You can’t just say “I’m out of here” and then they send you a check in the mail the next month. There is a bit of paperwork involved, but we’ve tried to make the process relatively easy through the online account.
Seth
Yeah, so we survey a lot of folks after they retire and try to get feedback on how we can improve our processes. And one of the most common things we hear from people is like, “I didn’t realize how easy this process would be to start my DRS pension,” but that there are a lot of other parts of retirement, Social Security and Medicare and maybe other retirement accounts.
Jenny
And your DCP account maybe.
Seth
Lots of different decisions to make.
Jenny
Yeah. Choosing a beneficiary and survivor.
Seth
Yeah. So, the actual retirement application process with DRS and once again, we have a number of good videos on our website. They’ll show you screens, they’ll walk you through the process if you feel intimidated by it. But I think once a lot of people get into the process, they realize, “oh, there’s only a few things I have to know or ask.”
You have to, as you talked about, “am I going to provide a survivorship option to someone?” So that’s one big decision that you have to make. Another big decision is what day are you actually going to stop working? If you’re actively working, what day are you going to stop? And then you’re going to retire effective the first [day] of the following month.
For people who have already stopped working, that’s an easy decision. It’s just when you turn 65. When you turn 65 the month after, you’ll start your retirement. There are some other decisions around how you’re going to have tax withholdings set up. And that’s once again, we have some calculators on our website that help people navigate that process.
But it’s really just like when you start a new job, you fill out a W-4. “I want to have it, you know, withheld at the married rate or the single rate” or whatever. And then the IRS tax tables take that into consideration. And that’s something you can change down the road as well. If you find that not enough is being withheld or too much is being withheld.
And then really, the last piece of information we need is your bank account information. We need to know where to deposit the money to. And you would actually be surprised. There are folks who call us, they haven’t worked for a month or two and they say, “hey, why is my retirement check come yet?” And it’s you know, they worked for an employer for 20 or 30 years, and they just didn’t realize that there were more steps to the process, that they had to notify us, that they had to make some of these decisions.
And we can certainly help people walk through that process. And I think the other good news, that I always try to remind people who are in that position is we’re always going to pay you back to when you stopped working to when you were first eligible. And so, you’ll get a retroactive payment if you missed a few pension payments because you were a little late in the game.
Ideally, we’d like people to start the process, you know, six months, three months in advance, it sort of depends on how quickly you need to make that decision as well. We can help get people through the process quickly if they need to. But ideally, it’s something you want to get started, contact DRS, get an official estimate of what your retirement benefits are going to be. And then complete the application that asks those handful of questions.
Jenny
Cool. Well, hopefully this gives our listeners a lot to think about.
Seth
Yeah, we should remind people that we also have an email address that they can email additional questions into, which I never remember the email address.
Jenny
Yeah, so if you have more questions send an email to drs.podcasts@drs.wa.gov.
Seth
Yeah, and you can find it on our website too on the podcast page if you need it.
Jenny
Yeah.
Seth
All right. Thanks, Jenny.
Jenny
Thank you.
[music outro]
Disclaimer
Thanks for listening. And now we’d love to hear from you. What topics would you like to hear about? What questions do you have for us? Send an email to drs.podcasts@drs.wa.gov that’s drs.podcasts@drs.wa.gov. The Department of Retirement Systems provides this podcast as a public service, but it’s neither a legal interpretation nor a statement of DRS policy.
References to any specific product or entity do not constitute an endorsement or recommendation. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. Views and opinions expressed by DRS employees are those of the employees and do not necessarily reflect the view of DRS or any of its officials.
